Lenders in Grocery Deal Likely Safe From Scrutiny

Whenever a leveraged buyout is announced these days, one of the first questions many deal watchers ask is: will the financing of the takeover run afoul of a new set of federal guidelines aimed at curtailing risky lending.

The Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation last year told banks that they should limit deal-related loans to six times a company’s cash flow, or earnings before interest, tax, depreciation and amortization. (As the Wall Street Journal chronicled in a front-page story in January, the rules are causing banks to sit out some lucrative deal-financing opportunities .)

Cerberus plans to borrow about $7.6 billion to help pay for the deal. The banks arranging the financing are Citigroup Inc., Credit Suisse Group AG and Bank of America Corp. Together with existing Safeway borrowings that will remain outstanding, the company will have total debt of about $9 billion after the buyout, according to Moody’s Investors Service. The ratings service estimates that Safeway will have annual Ebitda of about $1.55 billion then, meaning the grocer will have a leverage ratio of 5.8 times.

Other reasons the deal is unlikely to be a violation of the leveraged-lending guidance include the significant cash flow Safeway boasts as a grocery store operator and its substantial inventory, which could be sold to pay down debt.

But all that didn’t stop Moody’s from putting Safeway’s credit rating on review for a possible downgrade to so-called junk status from investment grade, citing a “high probability that the proposed transaction will result in significantly higher financial leverage.” Standard & Poor’s, meanwhile, said its Safeway rating could be lowered to junk if the transaction is completed. That would make Safeway the third North American company to lose its investment-grade status – becoming a so-called fallen angel — in 2014. U.S. midstream energy company ONEOK Inc. and the Government Development Bank for Puerto Rico are the other two, according to S&P.